Farmers incentivizing landowners to make tile improvements

Farm drainage tile systems in Illinois have aged, leaving many farms poorly drained, resulting in lower crop yields.

Upgrading farm drainage systems faces many hurdles, but landowners’ reluctance to invest in tile improvements is the primary obstacle.

This reluctance on the part of landowners results in lower farm profits for both the farmer and the landowner.

Most Farms Not Farmer-Owned

In Illinois, upwards of 75% of the farmland is owned by absentee landowners, who range widely in their willingness to invest in farm drainage tile for the benefit of the farm and their farmer.

Some do not want to spend any money on improving drainage, while others are willing and able to do so.

Farmers may be hesitant to request tile improvements, fearing that doing so will lead to higher cash rents. Many drainage projects remain undone.

Landowners Do Not Fully Understand The Yield Impact On ‘Wet’ Farms

Landowners often do not understand the yield benefits and improved profits associated with a sound farm drainage system, only seeing the costs.

Even with a good understanding of the financials, landowners on a fixed income may be unwilling to take on drainage projects.

A good, well-installed drainage system pays for itself, often within seven years or less, and provides more income for the landowner and farmer. See: https://tinyurl.com/Drainage-Tile-Project.

Farmers Can Help Pay For Tile Project Costs

Farmers can ask their landowner to partner on a drainage project by paying a portion of the tile installation costs.

Farm operators with substantial cash or credit availability who seek to establish a long-term relationship with a landowner can offer to help cover tile installation costs in a way that creates a positive farm income outcome.

Though farmers can easily recognize the benefits of a tile project, offering a financial incentive to the landowner may help secure its implementation.

One method to motivate a landowner is to offer to pay an annual tile fee to help the owner recover tile costs. This fee is charged annually — redundant? — over a set period, in addition to the typical cash rent.

In this kind of agreement, a tile fee is up to 50% of the total drainage project cost, with fee payments made by the farmer to the landowner, spreading the farmer’s obligation over five to 15 years.

Short-term tile payments can be cost-prohibitive for farmers, but spreading them over 15 years makes cash flow difficult for landowners, as the annual return doesn’t cover installation costs.

Another method to consider is a lump-sum payment for a percentage of the project. The amount of this one-time tile fee to the farmer typically ranges from 25% to 50% of the total cost of the tile project.

This article is not to be construed as legal advice. Consult with your legal adviser before entering tile agreements.

Well-thought-out negotiations between the owner and the farmer are essential to ensuring a collaborative long-term partnership. If the lease ends early, the farmer will be repaid for the unused portion of their investment.

For example, if the farmer pays $50,000 of the $100,000 project cost, a negotiation might include guaranteeing the lease for 10 years and paying back 50% of the fee if the lease is ended after only five years.

Flexible Cash Leases Can Help Meet Cash Flow Needs For Both Parties

Tile improvements have been proven to increase yields on a farm, which also means a higher cash rent charge.

If the farmer participates in the tile project’s costs, a flexible cash lease may be useful for both parties. In flexible cash rent, a base rent is negotiated based on typical yields.

The rent paid to the landowner can then increase if yields and prices are higher and be paid as a bonus when the yields and grain prices for the production year are known.

The flex rent allows the farmer to control costs upfront and pay for the variable flex portion of the rent with the higher yields. Higher yields pay the owner well for the investment and can provide added income to offset farmer costs.

Building strong relationships between the owner and the farmer is essential in any lease situation, especially when dealing with farm tile.

Tile improvements can pay for themselves quickly, but even in lower-profit years the obstacles can still be challenging for both parties.

Designing a well-thought-out agreement to share in farm tile costs can be profitable for both the landowner and the farm producer.

For more information on a flexible cash lease: tinyurl.com/Flexible-Cash-Lease.